FHA vs Conventional vs VA — which program fits which household

Three federal-backed mortgage programs cover the vast majority of US home purchases for households who do not bring 20% cash down: FHA (Federal Housing Administration), conventional with PMI (typically Fannie Mae or Freddie Mac backed), and VA (Department of Veterans Affairs). They differ structurally in credit requirements, down payment minimums, mortgage insurance treatment, loan limits, and eligibility. For a given household, one of the three is usually meaningfully better than the other two — the choice is not interchangeable, and the wrong choice can cost tens of thousands of dollars over the loan life.

This guide walks through what each program actually is, the side-by-side mechanics that matter for a real purchase decision, three worked examples covering common household profiles, and the specific situations where each program clearly wins.

What each program actually is

FHA loans are mortgages issued by private lenders but insured by the Federal Housing Administration, an agency within the US Department of Housing and Urban Development (HUD). The FHA insurance protects the lender against default, which lets the lender accept lower credit scores and smaller down payments than they would on an uninsured loan. The borrower pays for that insurance via an upfront Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount (financed into the loan) plus an annual MIP of 0.55% to 0.85% of the outstanding balance depending on loan-to-value and loan amount, paid as part of each monthly payment. The annual MIP is generally permanent for the life of the loan if the original LTV exceeded 90%.

Conventional loans are mortgages issued by private lenders without federal insurance, typically sold to Fannie Mae or Freddie Mac in the secondary market. Loans under the conforming loan limit follow Fannie/Freddie underwriting guidelines (the “conforming” loans most buyers encounter); loans above the limit are “jumbo” loans with stricter underwriting. Down payments below 20% require Private Mortgage Insurance (PMI), purchased by the borrower from a private insurer (Genworth, MGIC, Radian, others). PMI typically costs 0.3% to 1.5% of the loan amount annually depending on credit score and LTV, and falls off automatically when LTV reaches 78% based on original property value or when the borrower requests removal at 80% LTV based on current appraisal.

VA loans are mortgages issued by private lenders and guaranteed by the Department of Veterans Affairs for eligible veterans, active-duty service members, certain reservists, and qualifying surviving spouses. The guarantee covers a portion of any potential lender loss in default, allowing lenders to offer terms not available on the open market: no down payment requirement, no PMI, and competitive interest rates. VA charges a one-time “funding fee” of 1.25% to 3.3% of the loan amount (varying by down payment size and prior VA loan use), which is financed into the loan and is the only material cost premium for the program. Veterans with certain service-connected disabilities are exempt from the funding fee entirely.

Side-by-side mechanics

Dimension	FHA	Conventional with PMI	VA
Minimum down payment	3.5% (FICO ≥580) or 10% (FICO 500-579)	3% (first-time buyer, FICO ≥620) or 5% standard	0%
Minimum FICO	580 (3.5% down) / 500 (10% down)	620 with overlay penalties below 740	No federal minimum; lender overlays typically 580-620
Mortgage insurance	Upfront 1.75% + annual 0.55-0.85%	PMI 0.3-1.5% annual	None
Insurance removal	Permanent for loans with LTV >90% at origination; refinance to conventional to escape	Automatic at 78% LTV; request removal at 80% LTV	N/A
Loan limit (2026 baseline)	$541,287 floor (one-unit, most counties; $1,249,125 ceiling in high-cost areas)	$832,750 conforming	Effectively unlimited (lender overlays apply)
Funding fee	1.75% UFMIP rolled into loan	None	1.25-3.3% funding fee rolled into loan (waived for disabled vets)
Occupancy	Owner-occupied only	Owner-occupied, second home, investment	Owner-occupied only
Eligibility	Anyone meeting credit + DTI	Anyone meeting credit + DTI	Service member, veteran, surviving spouse
Number of loans allowed	Usually 1 FHA at a time	Multiple permitted	Multiple permitted with available entitlement

Worked example 1: First-time buyer, $80,000 income, $400,000 home

A first-time buyer earning $80,000, with a 690 FICO, $20,000 in savings (5% down on a $400,000 home), no military service.

FHA option:

• Loan amount: $385,250 (after 3.5% down) + $6,742 UFMIP financed = $391,992
• Estimated rate (2026 avg, FICO 690): 6.85%
• Monthly principal + interest: $2,569
• Annual MIP (0.85% × $391,992): $277/month
• Estimated property tax + homeowners insurance: $750/month
• Total monthly: ~$3,596

Conventional 5%-down option:

• Loan amount: $380,000
• Estimated rate (FICO 690 with LLPA penalty): 7.25% (the LLPA matrix penalizes 690 FICO at 95% LTV)
• Monthly principal + interest: $2,592
• PMI (0.75% × $380,000 / 12): $238/month
• Property tax + insurance: $750/month
• Total monthly: ~$3,580

For a 690 FICO at 95% LTV, conventional and FHA are within $20/month of each other. The FHA wins slightly on rate but loses on permanent MIP; conventional has higher LLPA-adjusted rate but PMI drops off at 78% LTV (around year 9-10 of the loan based on amortization). Over 30 years, conventional saves $25,000+ in cumulative MIP/PMI because the PMI drops off but FHA MIP does not.

For this borrower: conventional wins, primarily because of the eventual PMI dropoff.

Worked example 2: First-time buyer, $55,000 income, 615 FICO, $300,000 home

A first-time buyer earning $55,000, with a 615 FICO (recent thin file recovery), $12,500 in savings (4.2% of $300,000), no military service.

FHA option:

• Loan amount: $289,500 (after 3.5% down) + $5,066 UFMIP = $294,566
• Estimated rate (FICO 615, FHA): 7.10% (FHA accepts lower scores without aggressive penalty)
• Monthly principal + interest: $1,981
• Annual MIP: $209/month
• Property tax + insurance: $600/month
• Total monthly: ~$2,790

Conventional option:

• Loan amount: $285,000 (5% down requires another $2,500 saved)
• Estimated rate (FICO 615 with LLPA): 8.25%+ (conventional LLPA matrix heavily penalizes <660 FICO)
• Monthly principal + interest: $2,141
• PMI (FICO 615 + 95% LTV typically priced at 1.45%): $345/month
• Property tax + insurance: $600/month
• Total monthly: ~$3,086

Conventional costs roughly $300/month more for the same house with the same down payment due to the LLPA rate penalty for sub-660 FICO. FHA saves $3,600/year for this borrower. The permanent MIP only becomes worse-than-conventional after 9-10 years when the conventional PMI drops off; before that, FHA is materially cheaper.

For this borrower: FHA clearly wins. The borrower can plan to refinance to conventional once FICO improves past 700 in 2-3 years.

Worked example 3: Veteran with $400,000 home purchase

A 5-year US Navy veteran earning $90,000, with a 720 FICO, $15,000 in savings, full VA entitlement.

VA option:

• Loan amount: $400,000 (0% down)
• Funding fee (first VA loan, no down payment): 2.15% = $8,600 financed
• Total financed: $408,600
• Estimated rate (FICO 720, VA): 6.65% (VA rates are typically the lowest of the three programs)
• Monthly principal + interest: $2,624
• No PMI, no annual MIP
• Property tax + insurance: $750/month
• Total monthly: ~$3,374

Conventional 5%-down comparison:

• Down payment: $20,000 (would require saving another $5,000)
• Loan amount: $380,000
• Estimated rate (FICO 720, 95% LTV): 7.10%
• Monthly principal + insurance: $2,557
• PMI: ~$190/month
• Property tax + insurance: $750/month
• Total monthly: ~$3,497

For this veteran: VA wins by $123/month AND requires $5,000 less in down payment. Over 30 years, the VA loan saves roughly $45,000 in cumulative interest + insurance versus conventional, while preserving liquidity at closing. The funding fee adds $8,600 to the loan but is more than offset by no PMI and lower rate.

For an eligible veteran with even modest savings, the VA loan is almost always the right choice. There is no scenario where FHA or conventional beats it materially when the buyer is eligible.

When each program clearly wins

FHA is the right choice when:

• FICO is between 580 and 660 and any other path requires waiting to build credit
• Down payment savings are limited (3.5% down acceptable vs the 5% conventional minimum)
• Future plans include refinancing to conventional within 5-7 years (escaping permanent MIP)
• Property purchase price is below the FHA loan limit for the county
• The borrower is unable to qualify for conventional due to debt-to-income ratio (FHA accepts higher DTI than conventional)

Conventional is the right choice when:

• FICO is 680+ (the LLPA matrix becomes friendly)
• Down payment is 10% or more
• The borrower plans to stay in the home long enough for PMI to drop off (~8-10 years at typical amortization)
• The property is a second home or investment property (FHA and VA both require owner-occupancy)
• The borrower wants to avoid permanent mortgage insurance regardless of FICO

VA is the right choice when:

• The borrower is eligible (active duty, veteran, qualifying reservist, qualifying surviving spouse)
• Any down payment is available (technically zero is allowed)
• The borrower wants the lowest available monthly payment
• The borrower wants to preserve cash for home repairs, furnishings, emergency fund

The only scenario where an eligible veteran might choose otherwise: if they want to keep their VA entitlement for a future purchase (the VA loan benefit can be reused, but only after the prior loan is paid off or assumed by another eligible veteran). For first-time buyers with no plans for serial home purchases, this is not a meaningful constraint.

State-level and lender-overlay considerations

The federal program mechanics above apply uniformly across all 50 states. Where states and individual lenders add variation:

• Lender overlays on FICO: many lenders refuse to accept the federal FICO minimums and impose their own (e.g., 620 minimum on FHA even though HUD allows 580 with 3.5% down). Shop multiple lenders for the same program before assuming the FICO floor.
• State-specific first-time homebuyer programs can layer on top of FHA or conventional loans, sometimes providing down payment assistance grants or below-market second mortgages. California’s CalHFA, New York’s SONYMA, Texas’s TSAHC all have specific overlay programs. The combinations can be valuable; check state housing finance agency websites.
• VA county loan limit overlays: most lenders cap VA loans at the conforming loan limit for the county even though the VA itself has no statutory limit since 2020. Higher loan amounts require either a down payment on the excess or shopping for a VA-specialty lender willing to extend the limit.
• MIP/PMI premium variation by insurer: PMI rates differ by provider, so shop quotes across at least two insurers before locking in a conventional loan.

What this guide does not cover

This guide focused on the three primary owner-occupied federal-backed mortgage programs for purchase money loans. It does not cover:

• USDA Rural Development loans — a smaller fourth program for rural properties (defined by USDA-published maps) with 0% down requirement and household income caps. Worth considering for buyers in eligible rural areas; warrants its own analysis.
• Jumbo loans — conventional loans above the conforming limit, with stricter credit and down payment requirements than mainline conventional. Important for high-cost metros like SF, NYC, Boston, Seattle.
• HELOC and home equity loans for existing homeowners — these are secondary mortgages or lines of credit secured by home equity, not purchase money loans.
• State-specific programs in detail — touched on briefly; deserves a state-by-state guide.
• Refinancing between programs — refinancing an FHA loan to conventional (to escape MIP) has specific mechanics worth its own piece. The VA Interest Rate Reduction Refinance Loan (IRRRL) for existing VA borrowers similarly warrants separate analysis.

For the mainline new-purchase decision among FHA, conventional, and VA, the framework above is complete.

What to verify before applying

Always pull current-year program specifics from these sources:

• FHA loan limits and program rules: hud.gov/program_offices/housing/sfh
• Conventional conforming loan limits: fhfa.gov/data/conforming-loan-limits
• VA home loan eligibility and program: va.gov/housing-assistance/home-loans/
• Fannie Mae LLPA matrix: singlefamily.fanniemae.com/media/9391/display (the credit-score-based rate adjustment table)
• HUD FHA Loan Performance Trends: hud.gov/program_offices/housing/comp/rpts/fhalpt

The structural comparison in this guide does not change year to year. What changes: the conforming/FHA loan limits (updated each November for the following year), specific PMI/MIP rates, VA funding fee schedule, and the LLPA matrix. Verify the current numbers before locking your specific rate quote.